普爾特房屋 (PHM) 2012 Q4 法說會逐字稿

Good morning.

My name is Jody and I will be your conference operator today.

At this time, I would like to welcome everyone to the PulteGroup Incorporated fourth quarter 2012 financial results conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would now like to introduce today's speaker Jim Zeumer, Vice President of Investor Relations for PulteGroup.

Please go ahead.

Thank you, Jody, and good morning, everyone.

I want to thank you all for participating in today's call to discuss PulteGroup's 2012 fourth quarter financial results.

On the call today are Richard Dugas, Chairman, President and CEO; Bob O'Shaughnessy, Executive Vice President and Chief Financial Officer; Mike Schweninger, Vice President and Controller.

And also joining us today is Jim Ossowski.

Jim will be assuming the title of Vice President, Finance and Controller.

Jim will be replacing Mike, who is heading to Florida and assuming a new position as Area Vice President of Finance for our Southeast area.

Before we begin, copies of this morning's press release and the presentation slides that accompanies today's call have been posted to our corporate website, at pultegroupinc.com.

Further, an audio replay of today's call will be available on the site later today.

Also, please note that any non-GAAP financial measures discussed on this call, including references to gross margins reflecting certain adjustments, are reconciled to the US GAAP equivalent as part of the press release and as an appendix to this call's presentation slide deck.

Finally, today's presentation may include forward-looking statements about PulteGroup's future performance.

Actual results could differ materially from those suggested by our comments made today.

The most significant risk factors that could affect future results are summarized as part of today's earnings release and within the accompanying presentation slides.

These risk factors and other key information are detailed in our SEC filings, including our annual and quarterly reports.

With that let me turn the call over to Richard Dugas.

Richard?

Thanks, Jim, and good morning, everyone.

I'm pleased to be with you this morning to have the opportunity to discuss PulteGroup's very positive fourth quarter and full year results.

2012 was a year of important accomplishments for the Company, both in terms of the financial results we delivered and the progress we made against the business initiatives we have been pursuing.

As many of you know, 24 months ago we launched our value creation program, which has served to dramatically reorient our organization, our strategies, and our operating processes, as we seek to improve our business performance and drive higher returns on invested capital.

At the outset, our activities were tactical, as we deployed new processes and tools to support the value engineering, should costing and strategic pricing initiatives we have discussed across the organization.

Building on these early efforts, we are now part way through implementing broader initiatives relating to common plan management and product and purchasing zones.

All these activities relate directly to our stated goals of expanding gross margins, leveraging overheads, accelerating inventory turns, and driving improved capital efficiency.

By improving PulteGroup's performance in each of these key metrics, we aim to deliver superior returns on invested capital, which we believe will drive greater returns for our shareholders.

While the US housing market is clearly getting better, the differentiating -- and differentiating market improvement from our own internal initiatives can be challenging, we feel the relative gains we have delivered in operating margins these past several quarters point to the real company-specific progress we are making.

At this stage, we are extremely pleased with the results we have delivered, and I remain excited about the opportunities we continue to identify for additional gains in the future.

I look back on the year and the overall progress we have made with a sense of satisfaction.

That is not to say we are satisfied, but certainly encouraged by the successes we realized in delivering better financial and operating results throughout the year.

In terms of financial performance, we reported net income of $206 million for the year ended December 31, 2012, compared with a net loss of $210 million in 2011.

As detailed in our press releases, reported results for 2012 and 2011 included certain net charges of $70 million and $236 million, respectively.

Whether you assess the year-over-year gains with or without charges, it is clear that we are driving a lot more of each revenue dollar to the bottom line.

All the more encouraging to us is that the net income gain was the result of improvements in the fundamental business drivers on which we have been focused.

More specifically, PulteGroup's full-year 2012 adjusted gross margins increased by 300 basis points over last year.

Our progress has been steady and we have been able to deliver 8 quarters in a row of sequential margin gains.

We can't assure an uninterrupted string of quarter to quarter increases every year, but we do expect margins to move higher for 2013, assuming housing demand doesn't experience a dramatic change for the worse.

Layering on top of the expansion in adjusted gross margin in 2012, we were also able to realize a substantial improvement in overhead leverage, as SG&A as a percentage of home sale revenues fell almost 200 basis points from 2011.

As we have discussed on prior calls, our goal is to improve returns by expanding margins, controlling cost, and accelerating inventory turns.

We have also explained that over the near term, we could best achieve our goals by focusing on growth within our existing communities.

Our results speak to our success, as we realized a 25% increase in full-year net new orders from 4% fewer communities.

Said another way, in 2012 we generated almost 4,000 more sign-ups and an additional $1.5 billion in sign-up value from approximately 30 fewer communities.

I'm not sure such jumps in absorption pace per community are repeatable every year, but the obvious benefits we were able to drive in terms of cash flow and returns were dramatic.

This is best exemplified by the fact we were able to generate sufficient cash flow during the year to fund our operations, pay down almost $600 million of our senior notes, and still increase our cash position by $292 million.

Our focus on running a more efficient operation also led to a substantial increase in the Company's return on invested capital.

We still have a lot to accomplish as we work toward achieving acceptable returns, but I am confident that we are on the right track.

Looking ahead to 2013, we have every reason to expect that housing has indeed turned the corner and that industry sales in 2013 can continue to move higher, as pent-up demand is released.

That being said, we will keep a cautious eye toward any potential negative impact from the government budget debates, GSE reform discussions, and a host of other government policy issues that could develop in the coming quarters.

Despite these potential disruptions to the current momentum, we are bullish on macro housing demand for 2013 and beyond.

The combination of incredibly low mortgage rates, continued increases in rental rates, and especially rising home prices, and very low, and likely to stay low, inventory levels for housing lead us to believe that 2013 will be a better year for US housing than 2012.

Given this improved outlook on the macro market and our confidence in our ability to generate better returns on new capital deployed, during our planning process we authorized an additional $250 million of investment in land and related development per year in both 2013 and 2014.

This incremental capital raises our planned land spend to an estimated $1.2 billion for each of the next two years, compared with $925 million in 2012.

Given our improving construction efficiencies, stronger balance sheet, and expectations for improving demand, we are comfortable putting incremental dollars into the business.

We will, however, do so in a prudent fashion and continue to use our risk-weighted, return-based criteria when evaluating any new projects.

We are not going to chase volume, but intend to invest intelligently with a focus on improving overall returns and, ultimately, shareholder value.

For all the progress we have made in the quarter and over the past two years, we still see opportunities to improve our fundamental operating and, in turn, financial results.

The gains we have made to date, however, confirm we are focused on the right strategy.

Let me now turn the call over to Bob for more details on our quarterly results.

Bob?

Thank you, Richard, and good morning everyone.

As Richard discussed, we are continuing to pursue the initiatives that are driving today's improved operating performance, which we believe have established a foundation for sustained gains over time.

Looking at our income statement, we're pleased to report that we generated fourth quarter earnings of $59 million, or $0.15 per share, which include net charges of approximately $73 million, or $0.19 per share.

The net charges include $81 million of mortgage and debt repurchase charges, which were partially offset by $8 million of tax benefits associated with the favorable resolution of certain tax matters.

In the fourth quarter, net new orders totaled 3,926 homes, which represents an increase of 27% over last year.

Our increased sign-ups for the period were generated from fewer communities, as we realized better absorption paces within our existing projects.

Consistent with the first three quarters of the year, we saw improved demand for each of our brands in the fourth quarter.

On a year-over-year basis, the 27% aggregate increase in net new orders included increases of 41% at our Pulte communities, 2% at our Centex communities, and 38% at our Del Webb communities.

We are particularly pleased by the increase in sales paces at our Del Webb communities.

As we have discussed, the Del Webb buyer has been slower to return to the market, given the discretionary nature of their purchase, their need to sell an existing property, and their fiscal conservatism.

Over the course of 2012, we saw a very positive trend developing in the demand for Del Webb homes.

On a year-over-year basis, Webb sign-ups increased 6% in Q1, 17% in Q2, 23% in Q3, and 38% in the most recent quarter.

The demand trend we saw in 2012 is encouraging, given how much volume these communities can generate in a year.

The mix of our orders did not change materially in the quarter, as Pulte represented 45% of sign-up volumes, Centex was 27%, and Del Webb increased slightly to 28%.

Orders for the quarter were generated from 670 communities, which is down 4% from last year, slightly better than the guidance we provided at the start of 2012.

We currently project that our community count will decline by 10% to 15% in 2013, before turning up in 2014, as we invest the incremental capital Richard mentioned.

As we have demonstrated this year, multiple factors influenced sales volumes, including absorption pace per community and the underlying size of the given community.

The latter point is especially relevant to us, given that often maintain larger communities, particularly within our Del Webb brand.

Walking down the income statement for the fourth quarter, home sale revenues were $1.5 billion, an increase of 27% compared with last year.

The increase in revenue was driven by a 20% increase in closings, to 5,154 homes, in combination with a 6% increase in average selling price, to $287,000.

The mix of closings for the quarter is consistent with the sign-up trends we saw throughout 2012, which resulted in higher sales from Pulte Homes branded communities.

Closings in the fourth quarter break down as follows.

47% from Pulte, 27% from Centex, and 26% from Del Webb.

The increase in our average selling price reflects the continued shift in our product mix from the first-time buyer toward the move-up buyer, as well as price increases realized within our markets.

Land sale revenues were $37 million in the quarter, as we continued to opportunistically divest non-core land assets.

For the full year, we disposed of $107 million of non-core land assets.

It's difficult to forecast land sales, but we will continue to pursue such transactions when appropriate.

In the fourth quarter we reported an adjusted gross margin of 21.8%, which is an increase of 320 basis points over the comparable prior-year period.

On a sequential basis, margins grew 20 basis points.

Similar to prior quarters, gross margin benefited from company-specific and industry wide factors, including the improved demand and pricing environment, further expansion of our move-up buyer business, our strategic pricing initiatives, and our ongoing efforts to lower house construction costs.

We typically focus on adjusted gross margins, but I want to call your attention to the capitalized interest component of our home builder cost of sales.

For the year, we amortized $224 million of previously capitalized interest costs.

Looking at 2013, we expect capitalized interest expense amortization for the full year to increase to approximately $260 million.

Our continued focus on improving our capital efficiency and inventory turns means that interest will be relieved from the balance sheet more quickly.

It's important to note that we expect our decrease in leverage and resulting reduction in cash interest costs will result in lower capitalized interest amortization in 2014 and beyond.

In the fourth quarter, we realized further leverage on overheads, as SG&A dropped 40 basis points, to 9.6% of revenues.

In absolute dollars, SG&A for the period increased 21%, to $142 million, with the biggest contributor to the increase being incentive compensation resulting from the Company's improved financial results.

We have made meaningful progress on gross margin and SG&A, which have been key focus areas for the Company.

We will continue to pursue opportunities to drive gross margins higher, while we maintain discipline in controlling our SG&A spend.

Looking further down the income statement, we reported other expenses of $42 million, which includes $32 million of charges related to the Company's repurchase of $496 million of senior notes during the quarter.

Turning to Financial Services, we originated 3,625 loans with a principal amount of $829 million in the quarter.

Higher loan originations for the period reflect the increased closing volumes from our home building operations, as well as 120 basis point increase in our capture rate, to 83%.

While our underlying mortgage operations continued to operate in a favorable interest rate environment, we recorded a mortgage repurchase reserve adjustment of $49 million, which resulted in our Financial Services reporting a fourth quarter pre-tax loss of $24 million.

As we have discussed previously, our reserve estimate was based on the assumption that mortgage repurchase requests would continue through 2013.

Based on the trends we experienced in 2012, we have now changed this assumption and extended it by one year.

As a result, our estimate of repurchase obligations now reflects the Company's expectation that repurchase requests will continue through 2014.

You will also recall that on last quarter's call we highlighted that monthly repurchase requests in 2012 were elevated relative to the assumptions of our reserve estimates.

As you can see on page 11 of our webcast slides, we experienced a reduction in repurchase requests during the fourth quarter; however, the average number of requests in 2012 was still in excess of the levels assumed in our previous estimates.

As you can see, monthly put back volumes remain volatile, but the composition and overall profile of the underlying repurchase requests has not changed materially.

We continue to look for a comprehensive resolution of these issues, but do not have anything to update at this time.

Before we leave Financial Services, I want to highlight some full-year achievements from that business.

Looking at the full-year, loan origination volume increased 19%, to 11,322 loans, while capture rate increased 340 basis points, to 81.9%, helping to drive pre-tax income of $26 million, despite the $49 million repurchase reserve increase in the fourth quarter.

The increase in capture rate reflects the fact that our consumers and homebuilding operations value the outstanding customer service afforded by our mortgage operations.

Turning to our balance sheet, we've talked a lot about our desire to be more efficient with our capital.

During 2012, we made significant headway on this front, including a more capital efficient land acquisition and development process, a 56% decrease in our spec unit count, including a 66% decrease in our finished spec unit count, the re-establishment of a warehouse line for mortgage operations, and the ongoing sale of non-core land assets.

These actions helped to improve our operating performance and freed up a considerable amount of working capital.

As a result, we ended the year with $1.5 billion in cash, after paying down $496 million in senior notes during the quarter.

As Richard mentioned, we were able to generate sufficient cash flow during the year to fund our operations, pay down almost $600 million of debt, and still increase our cash position by $292 million compared to the end of last year.

Our improved operating results and significant debt pay down during the year helped to further reduce the Company's debt and net debt-to-capital ratios to 53% and 32%, respectively.

These numbers represent a significant improvement from just one year ago, when our reported debt-to-capital was 61% and our net debt-to-capital was 50%.

Richard also mention that we have authorized an additional $250 million per year of land and related improvement development spend, bringing our planned investment to approximately $1.2 billion in both 2013 and 2014.

This increase is obviously substantial, but we believe it's appropriate, given the improving market demand and the progress we have already made in repositioning our business.

I would note that even without the increased investment, we expect to be cash flow positive from operations in both years.

We certainly won't force investment into the system, and all spending will be subject to the underwriting criteria we introduced 18 months ago.

It's pleasing to note that our operators have embraced investing under our risk-weighted scoring system and understand the need to deliver required returns.

This investment discipline is now being employed in a land market that grows increasingly more competitive.

In fact, we recently surveyed our Division Presidents, and in better than 90% of our markets, we are seeing increased land acquisition activity among private builders, in addition to the ongoing demand from major public competitors.

And in a third of our markets, the increase was considered significant by the local team.

What makes it even more challenging is that in almost 100% of our markets, finished lots in better submarkets are considered scarce, for at least the next year or longer.

With the run-up in competition and land costs, it will be interesting to see the pace at which we will be able to invest the incremental capital against our return criteria.

The good news is that we have the resources to invest.

The better news is that I believe we also have the discipline to invest wisely.

As Richard said, we aren't chasing volume, so we can afford to be patient and disciplined.

Before turning the call back to Richard, let me review a few final data points.

We ended the year with a total of 6,458 homes in backlog, valued at $1.9 billion.

We ended the fourth quarter with 5,418 homes under construction, of which 77% were sold and only 23% were spec.

And finally, we ended the year with only 503 finished specs on the ground, which as I mentioned, represents a drop of 66% from the end of 2011.

Now let me turn the call back to Richard for some final comments.

Thanks, Bob.

As is our practice before opening the call to questions, I'll provide some additional comments on the demand environment we experienced during the quarter.

Broadly speaking, we realized improved demand in just about every market, which drove the 27% increase in year-over-year sign-ups we reported for the quarter.

More specifically, demand up and down the East Coast remained strong, with double-digit percentage increases in almost every market.

We continue to see notable gains reported by our operations in the New England area, the Carolinas, and Florida.

In fact, exceptional demand in our Florida markets is forcing us to take similar action to that in Phoenix, where we are purposefully slowing our rate of sales, as we focus on maximizing margin over driving volume.

Market conditions in the middle third of the country also showed continued strength in the quarter.

Demand in the Midwest was generally strong, with limited lot supply often being as big an influencer of reported sign-ups as buyer demand.

All of our Texas markets posted double-digit gains, with Houston delivering the biggest year-over-year increase in sign-ups during the quarter.

It likely won't be new news when I say that our operations out West continue to experience strong demand from Seattle through California and into the Southwest.

Consistent with comments we have made earlier, while demand in Arizona remains exceptional, we are continuing to moderate sales to maximize price and to avoid getting too far out ahead of production.

Consistent with the positive demand environment we experienced in the fourth quarter, all of our markets indicated that they were able to raise prices in at least one or more communities during the period.

In addition, 70% of our markets reported that they were able to raise prices in at least 50% or more of their existing communities.

Given the demand strength we saw in the quarter and for all of 2012, you can understand our desire to put additional capital to work in our markets.

We are now two years into our value creation work and the supporting initiatives focused on improving margins, leveraging overheads, accelerating inventory turns, and utilizing capital more efficiently.

Our annual financial results mark the progress that we are making on each of these metrics.

We still have a lot of opportunity and work ahead of us, but we remain focused on improving our fundamental operations every day.

I want to thank each of our employees for their work in delivering a great buying experience for customers, while implementing new processes to drive a more efficient homebuilding operation.

It is only through your efforts that we have been able to realize such meaningful gains in PulteGroup's performance.

And finally, this will be Mike Schweninger's last earnings call, as he is taking on a new challenge as Area Vice President of Finance for the recently expanded Southeast area.

Mike has done an outstanding job over the past four years as VP and Controller, and we know he will be equally successful in his new role.

We are fortunate to have a deep bench of talent in our organization, as we have expanded Jim Ossowski's responsibilities in naming him Vice President, Finance and Controller.

Jim has held a number of corporate and field positions during his 11 years with the Company, and we look forward to his continued contributions in his new role.

Now let me turn the call back over to Jim Zeumer.

Jim?

Thank you, Richard.

At this time, we will open the call for questions.

So that we can speak with as many participants as possible during the remaining time of this call, we ask you to limit yourselves to one question and to one follow-up.

We know there are some calls following this, so we are going to move through our Q&A as promptly -- as quickly as possible, so that we can get to as many questions as possible.

Jody, if you will explain the process, we'll get started with Q&A.

(Operator Instructions)

Bob Wetenhall, RBC.

Hello, gentlemen.

Nice quarter.

I was hoping you'd provide some color into the composition of the big move in gross margin.

You picked up 320 basis points.

If you could give us some color on what came from mix and what came from home size, that would be helpful.

It's difficult to break that down by square foot.

We don't have that.

But what we can say is that the mix shift in closings to the move-up buyer certainly helped, because that's our richest margin of business.

Obviously, market influences that.

The good news is that we think we have been able to take advantage of the market improvement with our pricing initiative.

So obviously, option margin per house is up, or option revenue per house is up about $4,000, which is almost a 12% increase.

Lot premium is up per house by about $1,400, which is about a 20% increase quarter over quarter.

Again, richer margin business, all at the same time while incentive dropped 200 basis points, from 6.1% last year to 4.1% this year.

So, all those market factors we were able to take advantage of through the new processes we've put in place.

And obviously, the should cost and value engineering efforts that we're undertaking, 17% of our volume has gone through that, and we're excited about the zone concept and our ability to build more consistently and efficiently in our floor plans.

That's really helpful.

Your dollar value of ASP's went from about $260,000 in the first quarter to $287,000.

So you had a nice $25,000, $26,000 pick up.

Can you give us some guidance in terms of your expectations for '13 and ASP performance?

Obviously, Richard's commentary about tight inventory supplies would suggest you have a lot of upward pricing power.

Can we get a magnitude, directionally, for what you're thinking?

Yes, we did certainly see increases.

If you look quarter-over-quarter, we are up 6%, to $287,000 on average.

If you look at that by brand, Pulte was up about 8%, to about $342,000.

Centex and Del Webb were about flat year-over-year.

But if you look in the backlog, the average selling price is $299,000, which is up about 11% over the prior year.

So obviously, mix is part of that, but pricing is up.

Ivy Zelman, Zelman and Associates.

Good morning, guys.

Good quarter.

Exciting for you.

Question, first on Del Webb.

Given that you've got community count that is actually shrinking, can you help us understand where absorptions are specifically for Del Webb, and how does that compare to historical absorptions, and maybe perspective pre-boom and where it's been on a longer-term basis?

Ivy, this is Richard.

One of the things we are excited about is the momentum we saw in the Del Webb business for the quarter.

To give you a perspective, we were up 6% in Q1, Del Webb year-over-year, and that grew every quarter to where in Q4, we were up 38% over prior year.

So we really like the trend in that business.

And it's following a very typical Del Webb pattern, where that category tends to lag the broader housing market, because of the buyers' general conservatism and need to sell a home.

So as you know, resale inventory is very low in many markets now, and it's really gotten better and better in that regard over the back half of the year.

So we're not surprised to see the Del Webb buyer coming back.

And that does give us reason for optimism as we head into '13.

Relative to historical trends, however, we are still well below what we may have generated from a typical Del Webb community, historically.

I think we have quoted before, some of our larger Del Webb communities in the past, we were able to do 700, 800, 900 units year.

We are still nowhere near that level for any of them.

I would say we're still less than half of that.

So depending on how the housing market continues to unfold from here, we think we have a lot of runway there, and one of the real X factors for PulteGroup, we believe.

Ivy, the pace in the fourth quarter of sales was 2.2 a month.

So clearly, similar to run there.

That's very helpful.

And then the second question relates to your comments, Richard, on the gross margin going forward.

You've spoken in the past about structural changes that you've made.

How much of your gross margin improvement going forward is going to be contingent on home price inflation, as opposed to the structural improvements and other factors that could be driving it, whether it be mix to the move-up, lower cost land bases -- you're longer land than a lot of your competitors -- and so I want to understand much of your margin expansion is contingent on HPA.

Ivy, a couple of comments here.

First of all, the biggest drivers in 2012 of our good margin expansion.

A combination of a strong reduction in spec inventory.

We're seeing much better margins in presale.

We're very proud of that, because it also helped returns and cash flow.

Mix shift, as well as the pricing initiatives we mentioned.

With regard to the other structural elements, Bob gave a comment just now.

I don't know if everybody caught it.

But we only had about 17% of our closings in the quarter that had the benefit of what we would call our big structural changes, which relate to value engineering, should costing, and more specifically, this notion of common plan management, where we're trying to drive a much higher percentage of our total closings through those efforts.

These would be homes that are consumer designed upfront, value engineered upfront.

If you will, we know they're going to be successful before we put them into sales, into production.

And only 17% of our volume is through that.

So I would suggest we have a lot of runway to go with regard to margin improvement, from those initiatives.

As it relates to how much are we counting on, obviously as much as we can drive there.

But we're not going to get into the habit of running the business banking on improved demand environment.

We want to be cautious.

We want to continue to buy A-plus properties.

And we think we're demonstrating that we're getting a lot out of our existing assets and we still have a lot to go there.

Mike Rehaut, JPMorgan.

Thanks.

Good morning, everyone.

Nice quarter.

First question has to do with the land spend and your current land inventory with the gap in community growth.

Certainly, having the long land that you possess is viewed as an asset, but maybe you could walk us through where you are in terms of unlocking some of that value and how much of it is -- why you are not working through some more of what is on the balance sheet, at this point.

Certainly, it would suggest that perhaps it's not a margin accretive move at this point.

And give us thoughts around how much is "mothballed" and when you expect to unlock that value.

Because certainly, community count growth down 10% to 15% is atypical in terms of the peer group right now.

Mike, this is Richard.

I will start, and then turn it to Bob for a little more comment on mothballed.

I would suggest we are unlocking a large amount of opportunity in our existing business.

Our sign-up growth last year was predicated almost exclusively on existing stores improving better, which was our thesis coming in all along.

We tend to have a much longer lived community portfolio than many of our peers do, so it stands to reason we have room to run within those existing communities, like Ivy's question on Del Webb, where we still have a lot of runway out in front of us, given the number of lots we have on the ground, and we don't need to invest in that business, specifically.

We feel we are executing our strategy exactly as outlined for the past couple of years.

We are focused on improving returns.

And as long as we can continue to drive acceptable paces in our existing communities, we feel like it is the right move.

Having said that, we are comfortable in implementing this additional investment now that we have outlined, but we are going to do so smartly.

We're not going to chase unit volume.

And I would suggest, the quality of the earnings that we want to deliver going forward is going to be focused primarily from margin growth, SG&A leverage, and some growth from additional assets over time, as we bring them online.

But that is our focus.

And ROIC is the name of the game.

We think we are doing a good job there.

In terms of how much is left from mothball, Bob, you might want to answer that.

We've never really answered that question, because how people define mothballed in some of our longer phase web developments may get a little confusing.

The only thing I would add to what Richard said is we opened 15 communities that were truly mothballed in fiscal '12.

We think we will open another 10 in fiscal '13.

There aren't that many more that we see that would be obvious to open today.

I appreciate that.

And I guess the second question, on the margins, going back to the comment of 17% of closings from the value engineering, should costing, common plan management, I think it would be helpful to understand what type of margin differential those closings currently generate versus the corporate average to get a sense of as this increases, what the upside from these initiatives are.

And if I could sneak in another one, any thoughts around moving the commissions out of COGS into SG&A?

I think 75% of your competitors do it that way.

I think it might be helpful, from an apples to apples.

Sorry to sneak two in there, but if you could.

Mike, I'll handle the first one.

All I will say regarding the common plan management work is that we do have better margins coming from those efforts than businesses -- or excuse me, plans that are not commonly plan managed.

I'm not going to give a lot of specific detail, but we like the upside that that ramping volume will give us as a percentage, in terms of our margin.

Bob, you want to handle the commission question?

We're comfortable with our presentation.

We can think about it, certainly, Mike.

Ken Zener, KeyBanc.

Good morning.

Good morning, Ken.

Your guidance of $260 million, I believe, in the interest, that's obviously going to -- on a higher sales revenue volume, result in some margin benefit, probably in the order of 100 basis points.

For the gross margin, excluding that, what would be some of the other puts and takes, as you're thinking?

What's your fixed cost in gross margin that you're going to get volume leverage, and how do you think about the price versus obviously the labor and material inflation, given that your land cost has been largely fixed and not inflating?

Ken, it's Bob.

I just want to be clear that incremental interest expense will be a detriment to reported gross margins.

On a dollar basis.

Correct.

Right.

But on a percentage of higher revenue, it's going to be --

Again, that's not a volume-based comment from us.

It's just, that is what our expectation, based on our expectation of turns, our interest expense will be.

And to your second point, the margin impact that we see of substance is commodity.

We've planned in our 2013, and it's reflected in our view of margin, about a $2,000 to $2,500 increase in house cost.

So maybe call it 1.5% or 1.6% of our actual house cost, it's maybe 80 basis points of margin.

And just to add on to that, your question on fixed versus variable.

For our composition of our margins, everything is variable.

Some people may have certain overheads that run through their margins on a specific basis.

We do not.

Okay.

I appreciate that.

And then, given your comments on community count and the trend down there, can you give us a feel for, at least in the fourth quarter, to understand the fixed versus variable mix in SG&A, which would give us the fixed G&A piece.

And with the community counts going where they are, do you expect lower fixed G&A in 2013, on a dollar basis?

I apologize, there was a lot in there.

The majority -- I think to Mike's point, our SG&A is largely dependent on our cost base, not on commissions, because that's up in cost of goods sold.

So I apologize, Ken.

I don't understand the question.

Ken, maybe just -- as we mentioned in previous calls, from and SG&A perspective, it 's all somewhat variable.

But we keep it fixed, given where we expect the business to be.

But to Bob's point, commissions don't impact it in the like.

So depending upon where we see the business going, we adjust our overhead structure accordingly.

Because most of it is people and other type costs.

And just to follow that, we went through a fairly lengthy and painful, in some ways, restructuring of the business, last piece of that 18 months or so ago.

We feel pretty comfortable with the structure that is in place today.

And what we've said is that doesn't flex dramatically based on whether volume ramps up -- and 2012 was a good example of that.

We got leverage with the increased volume.

And certainly, if you have lower community count, you may have one less salesperson, one less construction manager.

But don't' think it moves the needle very much on our SG&A expense.

David Goldberg, UBS.

Thanks.

Good morning, everybody.

Good morning, David.

My first question was about the comments on private builders, and private's getting more active than the land market.

And I thought that was very interesting.

Most of your peers would probably say that, although the privates want to be there, they are not getting financing.

So I'm wondering if you've heard about how privates are getting financing and how they are getting more aggressive in the land market, given that the ADC lending is still relatively tight for most privates, at this point.

David, this is Richard.

There's been a couple of larger privates that have been notably quite active in the land market, overall.

So I don't really have a lot of detail and color on where they're getting financing, but there's no question the land market has gotten heated, of late.

And our comments are just to help everybody understand, we don't want to chase volume, we want to chase good returns.

And we are very comfortable with a prudent, what we believe is intelligent, investment strategy going forward.

Our thinking all along was we needed to repair our balance sheet.

And now that we feel like we can generate really good returns, we're comfortable putting more into the business.

But we're just trying to reference the fact that in some markets, it is a real challenge to get land deals to pencil, and we want to be careful.

That make sense.

A quick follow-up.

Can you help us frame the additional $250 million, what that would do in terms of either the potential for growth or community counts.

I know it's difficult to average or generalize, but just give us an idea, if you were able to put the $250 million to work, what kind of growth that would support, or community count growth that would support.

David, the only thing we'll say -- and Bob gave the community count guidance for '13 -- it's not going to impact '13 in a community count way.

But we do believe it will impact '14, start moving the needle back up then.

We'll have more to say about that as we get through the year, but we've got to see how much of this capital we can actually put to work, what changes we may have to that capital assumption over the year as the market unfolds.

It's an evergreen process within the Company, and it's actually a very good process that, thanks to some help that Bob has given us in the way we think about this over the last 18 months, we reevaluate it every single quarter.

So I can tell you that directionally that incremental capital is not going to impact our 2013 community count in a positive direction, but we do believe it will start moving the needle in '14.

Adam Rudiger, Wells Fargo.

Thank you.

Richard, you talked a bit about not chasing volume, talked about focusing on quality earnings and returns.

I was wondering what that says about the longer-term thoughts on 2014 or '15, when we are in that normal environment.

Your thoughts on what that means for cash flow and how you will balance future cash flow, and how that relates to returning to cash to shareholders and how that differs from what Pulte was 10 years ago.

Adam, it's a great question.

And actually, we have some continued work to do to think about that over time.

And I think it's fair to say that we were definitely super bullish on land for a long time.

We saw some pain, some significant pain, as a result of that.

And we want to be more balanced going forward.

Our goal is to generate long-term returns on invested capital, because we think over the long run that's going to benefit our shareholders the best.

So what I would tell you is that in the past, it may have been heavy weighting toward land.

I think you've seen us take some aggressive moves with debt.

We think we are investing in land appropriately.

But the other uses of cash, including dividend and potential buybacks, are on the table.

And we will have more to say about that as we make decisions.

So nothing firm right now.

But over time, we are likely to be, I would suggest, more balanced in our overall approach than perhaps we have been in the past.

Okay.

And I wanted to follow-up on one of the other questions, because maybe I missed it or it wasn't clear.

Is the higher interest amortized next year -- or this year -- on a GAAP basis, are you expecting that to have a negative impact on your reported GAAP gross margin?

Or are you just talking about dollar amounts?

You've got an increase of reported interest expense that will flow through our gross margin, so it will be deleterious to income, compared to year-over-year.

Dan Oppenheim, Credit Suisse.

Thanks very much.

Was wondering if you could talk about -- you've talked about the land and the community count really impacting '14 and not '13, I guess.

You also talked then about the intentionally slowing sales in some of the markets.

So if we're thinking about that, and presumable the impact on community count is probably worst as we go through the first half of this year, in terms of year-over-year basis.

Is that correct?

Should we be thinking about orders that way, in terms of more of a focus on margin, but potentially hurting the orders here more during the first half than the second?

Dan, we're not going to provide any commentary on orders.

Our community count is going to be down this year, as we mentioned.

But we're not going to give a lot of guidance on exactly how it's down through the year.

I will just go back to some of the things that Bob mentioned when he was talking about community count.

And everybody is very focused on it in the outside world, but given our community count composition and things like same-store sales in existing communities, things like the overall balanced approach that we feel that we have to running the business, the Del Webb component, a lot of things impact volume.

Again, we are not providing volume guidance.

And I'm not going to provide any more specifics on community count.

But I guess I would leave it in that it's not only about community count, in terms of your volume.

Okay.

Thanks.

And then, you talked about the Centex orders being up 2%, and I was wondering in terms of land investment, you talked about more in terms of the higher end.

But how is the land investment focused, in terms of the Pulte and Del Webb and Centex are?

We've see the vast majority of our land investment recently go into the Pulte brand, with not as much into Centex or Del Webb.

We have one or two Del Webb communities that we are going to be opening this year, and some Centex communities, as well.

But the lion's share of the investment has gone into Pulte, because that's where we are seeing the best returns right now.

We are excited about the Centex brand over the long run.

We have new product that is focused there that is driving some, we believe, higher margins in that category and better profitability for us in that category, which will help the land transactions pencil more easily in the future.

But to date, most of the investment has gone into Pulte.

Nishu Sood, Deutsche Bank.

Thanks.

First question, on the balance sheet.

Your $1 billion tender brought in about half that amount in this last quarter.

And even with that, just coming in at half, your debt to capital dropping to 32% is pretty impressive.

Now looking forward, you have said you're going to -- you don't want to chase volume for volume's sake, but you are increasing the amount of capital spend.

At what stage -- how are you looking at leverage going forward?

Normalized, a lot of people would consider to be 40% to 45%.

Some builders might even run a little bit hotter than that in a recovery.

How far do you want that to go down, and how are you thinking about that going forward?

Nishu, it's Bob.

Interestingly, the tender, we offered for $1 billion, we actually got $222 million.

We then called our '13 paper, which was another $170 million.

And then we had open market repurchases, which were targeted in the '14s and '15s, of $104 million.

Looking at the maturity profile now, we have nothing due in '13, and then the maturity stack when you get out to '14 is just about $400 million.

And in terms of your question on how we view the investment, I think Richard covered that.

We are looking at the ways to utilize the cash balance we have.

We have talked about wanting to be at 40% debt to cap.

That would be a gross number, not net, so we've got some room to improve there.

Again, the economics don't make a lot of sense to us to go out and buy our debt today, because it is very richly price, particularly as you get into those outer maturity years.

So again, we think we accomplished a great deal this year.

We are proud of the fact that net debt to cap is in the 30s.

We think we've got some room to run there.

Obviously, we increased the investment that we're making in land.

$250 million this year shows that we're positive on the market and willing to put our money to work.

Obviously, the overall goal is to increase our returns.

Got it.

And a second question on the charge in the Financial Services division.

The $49 million, I believe it was.

The extra year of repurchase requests you are assuming here, and the delta that you experienced in '12 being higher than you had originally forecast, what time period does that relate to and what sorts of originations does that relate to?

It really has little to no change from what we've reported in the past.

Again, '06 and'07 originations by far the majority of what we're seeing.

Severity on these hasn't changed materially.

So it's really just we got more of them in 2012.

Now it's interesting, you can see from the chart that the volume went down in the fourth quarter after having spiked in the third quarter.

And what I would suggest is the same thing we said then, two or three months doesn't make a trend at that really elevated level that we saw in the third quarter.

We're not sure that what we saw in the fourth quarter is completely consistent with what we're going to see going forward.

So there's lots of estimates -- there's lots of process that goes into the estimates for the reserve.

But as we looked at it over the balance of 2012, the heightened level resulted in a higher cost to us; and then adding one year, obviously, drives a big change in the reserve.

Will Randow, Citigroup.

Good morning.

Thanks for taking my question.

In terms of your active lots, maybe that's a different way of looking at it, or total lots, could you give a breakdown between Del Webb, Pulte and legacy Centex?

I can do that.

From a -- about 38% of our controlled lots are Pulte, 23% are Centex, and 39% are Del Webb.

Okay.

And is that on an active basis or total basis?

We don't lift out active versus unactive, so those would be in our total controlled lot.

Okay.

Thank you for that.

I really appreciate the studies you guys put out on housing demographics.

Richard, how do you think about the echo boomers in the context of the sub 35-year-olds today are underemployed, hopefully not chronically, due to baby boomers not leaving the workforce and retiring.

How do think about that from a big picture perspective?

And how do you think that will hit your business?

I think we are going to need to be very value focused in order to capture demand in that environment.

And I do believe that mortgage availability for that category is something that we need to pay attention to.

Hopefully, underwriting over time will ease a little bit from pretty severe restrictions today in order to allow us to capture that business.

But listen, we are focused our investment today where we think we have the best opportunity, which is primarily in the move-up category and in the active adult category, for a lot of the reasons that you are alluding to there.

Stephen Kim, Barclays.

Thanks very much, guys.

A couple of housekeeping questions, first.

Could you give us a sense for what your sticks and bricks level is looking like in dollars right now?

And the number of finished lots which you own?

Sure, I can give you that.

Our house inventory balance is $580 million at December 31.

our finished lots owned was 27,828, of which is 6,537 relate to house.

And just in addition to that, we control an additional 5,732 finished lots via options.

Okay.

That's great.

And the last question, regarding your margins going forward.

Can you give us a sense for your expectation of your ability to control specifically your hard costs, not addressing the labor here, but obviously we are starting to see some significant price increases coming through from the part of the manufacturers, and I was curious as to if you could share, in your view or not even in your view, some things that you've actually-- some success stories perhaps, in terms of your ability to be able to keep those costs down on a relative basis to your competitors, particularly your smaller peers.

Do you have any data supporting that that is actually happening?

Steve, a couple things from Richard.

And Bob, feel free to add anything.

A couple things.

We added, as Bob indicated, some money in our forecasting process this year assuming pressure from both materials and labor.

That was factored into our assumptions overall.

Despite that, we are confident in our ability to grow margins through the structural efforts that we have underway, including pricing that we see in the market, our value engineering work, et cetera.

So ye, while we are seeing the pressure that everyone else is seeing overall, we still are eclipsing that, in our mind, with the overall market environment allowing us to take margins higher overall.

I don't have any great data for you relative to smaller peers.

I don't know, Bob, if you have anything else there you want to add.

Stephen, I think the simple answer is, as a big buyer of service and commodity, we believe we absolutely have price competitive advantage over, to your question, smaller peers.

We buy things in bulk.

We have a team of people who are focused on national purchase contracts and/or significant contracts in markets.

So we think we have preferred provider status with many of our suppliers.

And it would range anywhere from how we purchase appliances to how we purchased lumber, paint.

Again, so relative to a small private builder, we think we have a competitive advantage.

Stephen, I might just add one other item.

I think as big an advantage in pricing that Bob alluded to, is the ability to get our homes built as one of the bigger builders in the country, and I know a couple of our peers have talked about this.

It's tough out there, particularly to find labor.

And we can command more folks on our jobsite than the smaller guys.

So I think, as big an advantage we may have in dollar and cents, we have in terms of being able to meet production quotas over time.

Alex Barron, Housing Research Center.

Thanks, guys.

I wanted to get your thoughts on the longer-term view of Centex.

I know you said you've got some stuff coming up, but we've seen the community count keep going down.

When do you guys think that's going to turn around?

It's very tough to forecast that overall.

Centex, unlike Del Webb, has a lot smaller communities, typically, for us, overall.

Listen, the best thing that we can tell you there is we like the buyer category, we're very committed to the buyer category.

We are continuing to invest in that category, not at the same rate, but that we're going to put our money where we can get the best returns.

And if we're not seeing as good returns in that category today, for a variety of reasons, we're not going to just push investment into that category just to push investment there.

We're very comfortable with our approach.

I can't answer the question in terms of when community count will start improving for Centex overall.

But let's leave it with the fact that we want to continue investing in that category, but doing so to generate the best returns for our shareholders.

Okay.

And how would you foresee the percentage of the mix that Centex will play a couple years down the road?

And also a separate question, are you guys starting to see -- or what percentage of your buyers would you say are people coming out of foreclosure rentals and starting to buy again?

Alex, with regard to the percentage, it is extremely hard to estimate out a couple of years.

I wouldn't hesitate to want to guess that.

I will say, on your second part of your question, we are starting to see people who have gone through the foreclosure process enter back.

Anecdotally, over the past six months or so, I have heard more and more of that, as people work through their three-year period and reestablish credit to be able to buy.

I think that's a good sign.

It's an indication that people want to buy housing.

And look, they are being squeezed really hard with rental rate increases.

We have talked about that repeatedly.

So that is a source of business for us in the future and we are continuing to be focused there.

Thank you.

There are no further questions at this time.

I will turn the call back over to Mr. Zeumer for closing remarks.

Jody, thank you.

I want to thank everybody for their time this morning.

We will be available for the remainder of the day, if you have any follow-up questions.

And we will look forward to speaking with you on our next call.

Thank you.

That concludes today's conference call.

You may now disconnect.